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ISLAMIC SOCIAL FINANCE REPORT

ISLAMIC SOCIAL FINANCE REPORT. Islamic Research & Training Institute Member of the Islamic Development Bank Group. Social Finance: What It Implies. Conventionally, social finance is defined as provision of financial services to

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ISLAMIC SOCIAL FINANCE REPORT

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  1. ISLAMIC SOCIAL FINANCE REPORT Islamic Research & Training Institute Member of the Islamic Development Bank Group

  2. Social Finance: What It Implies Conventionally, social finance is defined as provision of financial services to Achieve social protection of the poor; reduction in their vulnerability (ILO) and Includes: community investing, microfinance, social enterprise finance, outcome-based philanthropic grant-making and program-related investments Islamic Research and Training Institute Member of the Islamic Development Bank Group

  3. Islamic Social Finance (ISF) Report: Objectives Study on Zakah, Awqaf, Islamic Mutual and Not-for-Profit Microfinance Sectors with the following key objectives: • Estimate trends in flow of funds • Undertake comparative analysis of enabling environment, e.g. regulations • Document good practices of key players • Present stylized facts for further empirical research • Contribute to policy dialogue for development of the sector & facilitate reverse-linkage strategy of IDBG Islamic Research and Training Institute Member of the Islamic Development Bank Group

  4. Islamic Social Finance (ISF) Report: Structure Region under Focus: key economic and poverty-related indicators, potential of Islamic social funds in meeting resource gaps for poverty alleviation Zakah Sector: Trends in zakah mobilization and distribution; comparison of enabling environment; good practices at micro and meso levels Awqaf Sector: Estimates of existing awqaf; comparison of enabling environment; good practices at micro and meso levels Islamic Mutual and Non-Profit Microfinance Sector: Trends in the sector; comparison of enabling environment; good practices at micro and meso levels Islamic Research and Training Institute Member of the Islamic Development Bank Group

  5. Focus on Mainstreaming and Reverse-Linkage SE & South Asia Sub-Saharan Africa ISF Sector in IDB MCs & Muslim Communities in Non-MCs GCC Maghreb CIS, Russia & Europe Islamic Social Finance (ISF) Report: Revolving Focus Islamic Research and Training Institute Member of the Islamic Development Bank Group

  6. Trends in Zakah Collection in Indonesia(in billion IDR) Islamic Research and Training Institute Member of the Islamic Development Bank Group

  7. Trends in Zakah Collection in Malaysia (in million RM) Islamic Research and Training Institute Member of the Islamic Development Bank Group

  8. Trends in Zakah Collection in Singapore (in million S$) Islamic Research and Training Institute Member of the Islamic Development Bank Group

  9. Trends in Zakah Collection in Brunei Darussalam (in million BND$) Islamic Research and Training Institute Member of the Islamic Development Bank Group

  10. Trends in Zakah Collection • Indonesia: 231.6 mill USD in 2012 (Increased by over 32 times over 10 years) • Pakistan: 105 mill USD (by state) in 2011 (Increased by 40 percent over 3 years); 2 billion USD (state plus private) • Singapore: 20.4 mill USD in 2012 (Increased by 20.2 percent over 3 years) • Brunei Darussalam: 13.8 mill USD in 2010 (Increased by 55 percent over 10 years) • Malaysia: 547 mill USD in 2011 (Increased by 26.9 times over 20 years) • India: 1.5 billion USD (sample-based estimate, 2007) • Bangladesh: 1.4 billion USD in 2010 (estimate) *Estimates include p2p zakat; official agency in B’desh collected Tk14 million out of Tk110 million Islamic Research and Training Institute Member of the Islamic Development Bank Group

  11. Trends in Zakah DistributionDistribution Pattern in Indonesia (2012) Islamic Research and Training Institute Member of the Islamic Development Bank Group

  12. Trends in Zakah DistributionDistribution Pattern in Malaysia (2010) Islamic Research and Training Institute Member of the Islamic Development Bank Group

  13. Trends in Zakah DistributionDistribution Pattern in Singapore (2012) Islamic Research and Training Institute Member of the Islamic Development Bank Group

  14. Trends in Zakah DistributionDistribution Pattern in Brunei Darussalam (2010) Islamic Research and Training Institute Member of the Islamic Development Bank Group

  15. Trends in Zakah DistributionDistribution Pattern in Pakistan (2010) Islamic Research and Training Institute Member of the Islamic Development Bank Group

  16. Trends in Zakah DistributionDistribution Pattern in India (Sample Survey, 2006) Islamic Research and Training Institute Member of the Islamic Development Bank Group

  17. Trends in Zakah Distribution Indonesia, India, Pakistan, Bangladesh: Classification on the basis of sectors assuming zakat are primarily for the poor; Within the poor category, education, health, social safety nets receive priority; around ten percent for economic empowerment programs in Indonesia Malaysia & Singapore: Poor account for 35-40 percent; Fi-Sabilillah accounts for about 40 percent Islamic Research and Training Institute Member of the Islamic Development Bank Group

  18. Trends in Zakah Distribution • Proportion of zakat distributed to zakat collected shows reversion to unity over intervals for Malaysia, Singapore; in Brunei Darussalam it varies widely between 50-500 percent showing symptoms of zakat “holding” or accumulation of surplus. • Proportion of admin costs to zakat collected varies between 0-10 percent for most countries; except in India where anecdotal evidence shows the percentage to be as high as over 30 percent. Islamic Research and Training Institute Member of the Islamic Development Bank Group

  19. Enabling Environment for Zakah • Indonesia: Zakat Act 2011 • Pakistan: Zakat Ordinance, 1980 • India: No formal institutional or regulatory framework • Bangladesh: Zakat Fund Ordinance, 1982 • Malaysia: Administration of the Religion of Islam (Federal Territories) Act 1993 and similar Acts for individual provinces • Singapore: Administration of Muslim Law Act, 1999 • Brunei Darussalam: Laws of Brunei, 1/1984, Religious Council and Kadi Courts, Islamic Research and Training Institute Member of the Islamic Development Bank Group

  20. Institutional Structure for Zakah Management Indonesia: Dual system with state and private institutional actors Islamic Research and Training Institute Member of the Islamic Development Bank Group

  21. Institutional Structure for Zakah Management India: Private actors (individual and institutional) with no role for state Islamic Research and Training Institute Member of the Islamic Development Bank Group

  22. Institutional Structure for Zakah Management Pakistan and Bangladesh: Dual system with state and private actors (individual and institutional) Islamic Research and Training Institute Member of the Islamic Development Bank Group

  23. Institutional Structure for Zakah Management Malaysia, Singapore & Brunei Darussalam: State agency as the sole entity responsible for zakah management Islamic Research and Training Institute Member of the Islamic Development Bank Group

  24. Zakat Collection: What the Laws Say Zakat payment is • Mandatory: Malaysia, Singapore • Partially Mandatory (for specific financial assets): Pakistan Reasons for weak enforcement: Absence of muzakki database, Unwillingness of zakat officer to list down those who fail to pay zakat, Shortage of staff and Inadequate authority to zakat officer to investigate any failure • Voluntary: Indonesia, Brunei Darussalam, India, Bangladesh Islamic Research and Training Institute Member of the Islamic Development Bank Group

  25. Zakat Collection: What the Laws Say • Defining of Zakatable Assets: Indonesia, Pakistan • Defining Zakat Rates: Pakistan Provides for exclusion of a Muslim from zakat liability based on declaration that he follows a different school of fiqh Islamic Research and Training Institute Member of the Islamic Development Bank Group

  26. Zakat Distribution: What the Laws Say Allocation of zakat among Asnaf: • Priority in Distribution: Indonesia (productive activities only after the basic needs of mustahiq are fulfilled) • Definition of mustahiq with emphasis on tamleek: Pakistan • A decision of Majlis: Malaysia, Singapore & Brunei Absorption of operational expenditure: • Entirely by zakat mobilized without limit (Indonesia) • Partially by govtbudget and by zakat mobilized (Brunei Darussalam & Pakistan) Islamic Research and Training Institute Member of the Islamic Development Bank Group

  27. Accountability & Governance of ZIs: What the Laws Say • Collection and distribution by “authorized” amil: Indonesia, Malaysia, Singapore, Brunei Darussalam • Utilization of such funds is in conformity with Shariah as also with the intention of the donor(s): Indonesia • No Commingling of zakat funds with other charity funds: Indonesia • Mandatory reporting requirements to apex body: Indonesia Islamic Research and Training Institute Member of the Islamic Development Bank Group

  28. Accountability & Governance of ZIs: What the Laws Say • Elaborate administrative sanctions, revocation of amil license for violations of provisions: Indonesia • Financial & physical punishment for fraudulent practices: Malaysia, Brunei Darussalam, Indonesia • Penalty to be decided by Majlis: Singapore • Removal of erring member: Pakistan, Bangladesh Islamic Research and Training Institute Member of the Islamic Development Bank Group

  29. Enabling Environment: Fiscal & Other Incentives • Tax Rebate: Zakat paid is a deduction from tax payable: Malaysia • Tax Relief: Zakat paid is a deduction from taxable income: Indonesia, Pakistan, India* (Tax is reduced by “zakat paid” times the tax rate.) • Allowance for corporates: Malaysia • Assets for which zakat has been deducted at source shall be excluded from taxable wealth: Pakistan • No land revenue on land on the produce of which zakat has been charged: Pakistan *zakat to Non-profits treated as donations and qualify for tax benefit Islamic Research and Training Institute Member of the Islamic Development Bank Group

  30. Corporatization & Use of Technology Major contributor to growth in zakat mobilization in Malaysia Collection mechanism in no. of states in Malaysia* * Source: JAWHAR Islamic Research and Training Institute Member of the Islamic Development Bank Group

  31. Good Practices in Zakat Management:Micro View • DompetDhuafaRepublica, Indonesia Good Practices under Focus: Sustained growth in zakat mobilization with focus on transparency, modern fund-raising techniques; Economic empowerment program for poor communities • SKM Cancer Hospital, Pakistan Good Practices under Focus: Sustained growth in zakat mobilization with focus on transparency, accountability; Affordable healthcare to the poor • Akhuwat, Pakistan Good Practices under Focus:Innovative and sustainable ways to provide microfinance in a cost-less manner by leveraging philanthropy Islamic Research and Training Institute Member of the Islamic Development Bank Group

  32. Zakat Collection by DD • Out of Rp1.7 trillion total zakat & infaq collected in Indonesia* in 2011, DompetDhuafa and Rumah Zakat collected Rp 150 billion and Rp 146 billion respectively while the apex government agency BAZNAS collected Rp 44.16 billion. • In 2011 and 2012 DD collected zakat amounting to Rp 97.6 billion and Rp31.4 billion respectively. In 2013 till July, DD collected Rp43.7 billion * http://www.thejakartapost.com/news/2012/10/29/groups-challenge-govt-attempt-control-collecting-alms.html

  33. Self-Reliance & Sustainability Workshop Process Evaluation of Independence Socialization ISM Network & Business Development Feasibility Study: Beneficiaries Management of Asset Reform Induk Induk Mandatory Group Exercise Other Required Reinforcement KM KM Group Formation KM KM Financing Productive Business Business Mentoring Intellectual Autonomy Cadre Development Material Completion Systems Managerial ECONOMIC EMPOWERMENT MODEL OF DD (1) Inception & Growth Stage (2) Consolidation Stage (3) Self-Reliance Stage ISM is organized as Legal Regulated Cooperative or Other Institutional Structure ISM Strengthening Business ISM Strengthening Group-Basedand Institutional Business Strengthening Efforts Induk Induk Strengthening Organization KM KM Independent Admin System KM KM Strengthening Financial Reporting and Transparency Strengthening Mgt System of Local Institutions Strengthening of Capacities Strengthening Stakeholders Network at Local Level Mentoring Time mentoring

  34. Zakat Utilization by DD(Economic Programs: 2008-2012)

  35. Zakat Collection by SKMCH In 2011 zakat collection by SKMCH was 12.9 percent of total collections by government; growing by 29 times over 17 years. PKR millions Islamic Research and Training Institute Member of the Islamic Development Bank Group

  36. Zakat Utlization by SKMCH Islamic Research and Training Institute Member of the Islamic Development Bank Group

  37. SKMCH Good Practices • Systematic procedure to address the issue of commingling of zakat with other donations & revenues: • Zakat exclusively utilized for providing direct patient care to the poor patients; • Revenue from diagnostic services utilized for expansion projects/equipment and cover other hospital expenses (including salaries) • Of a total hospital budget of Rs. 5.2 billion for the year 2012, the amount required for providing direct patient care for the poor cancer patients was about Rs. 2.1 billion, while the zakat collections are about Rs. 1.6 billion. • Ministry of Religious Affairs, Zakat and Ushr of the Government of Pakistan disburses Rs.12 million from its Zakat Fund for the treatment of poor cancer patients each year, and has a permanent representative for monitoring the disbursement at the Hospital. Islamic Research and Training Institute Member of the Islamic Development Bank Group

  38. Summary of Good Practices for Zakah Sector • Government may be responsible solely for regulation and leave mobilization to private bodies • Where state is sole collector with agency agreement with private corporate entities, there should be no competition between the two • Zakah regulations should be dynamic with scope for continuous reforms • Zakah payment should be made compulsory with effective deterrents against evasion • Zakah payment should be allowed as a deduction to income tax payable and not just to taxable income Islamic Research and Training Institute Member of the Islamic Development Bank Group

  39. Summary of Good Practices for Zakah Sector • Corporatization is desirable as it enhances convenience for Muzakki; improves transparency • Accountability and good governance are key to sustainability and growth in zakah mobilization; require ensuring separation of zakah funds from other forms of charity; flow of zakah funds to designated beneficiaries by Shariah and by the Muzakki • Effective deterrents against misuse of zakah proceeds and violation of Shariah mandates relating to application of zakah funds must be in place Islamic Research and Training Institute Member of the Islamic Development Bank Group

  40. Summary of Good Practices for Zakah Sector • Effectiveness in zakah management requires ensuring that zakah payment does not encourage dependence and leads to economic empowerment • Priority rules of distribution require fulfillment of basic needs (relief and rehabilitation) of ultra-poor first and avoidance of carrying or investing any surplus • Efficiency in zakah management requires ensuring that cost of zakah mobilization is pegged below one-eighth of funds mobilized. Islamic Research and Training Institute Member of the Islamic Development Bank Group

  41. Key Findings on Awqaf Sector • Enabling Environment • Examples of Good Practices Islamic Research and Training Institute Member of the Islamic Development Bank Group

  42. Enabling Environment for Awqaf Sector • Indonesia: Act of Republic of Indonesia No.41 on Waqf, 2004 • Pakistan: Provisional Waqf Ordinances 1979 • India:Wakaf Act, 1995 • Bangladesh:Waqf’s Ordinance 1962 • Malaysia: Administration of the Religion of Islam (Federal Territories) Act 1993 and similar Acts for individual provinces • Singapore: Administration of Muslim Law Act, 1999 • Brunei Darussalam: Laws of Brunei, 1/1984, Religious Council and Kadi Courts, Islamic Research and Training Institute Member of the Islamic Development Bank Group

  43. Institutional Structure for Waqf Indonesia Islamic Research and Training Institute Member of the Islamic Development Bank Group

  44. Institutional Structure for Waqf India Islamic Research and Training Institute Member of the Islamic Development Bank Group

  45. Institutional Structure for Waqf Pakistan Islamic Research and Training Institute Member of the Islamic Development Bank Group

  46. Institutional Structure for Waqf Bangladesh Islamic Research and Training Institute Member of the Islamic Development Bank Group

  47. Institutional Structure for Waqf Malaysia and Brunei Darussalam Islamic Research and Training Institute Member of the Islamic Development Bank Group

  48. Institutional Structure for Waqf Singapore Islamic Research and Training Institute Member of the Islamic Development Bank Group

  49. Enabling Environment for Awqaf Sector India, Pakistan and Bangladesh: • Shared history • Permit private management by mutawallis but concentration of authority in state agency (absolute in case of Pakistan) • Emphasize preservation • Neglect or rule out developmental possibility (e.g. cap on leasing period of 2 years in India; exclude cash waqf); Perceived as obsolete, inefficient and costly • Outcome: development of existing waqf rare; no new social waqf; philanthropic projects in secular domain Islamic Research and Training Institute Member of the Islamic Development Bank Group

  50. Enabling Environment for Awqaf Sector Malaysia, Singapore and Brunei Darussalam: • Shared history • State religious council as the sole entity responsible for waqf management • Static and obsolete laws with severe restrictions on new waqf • State control may not necessarily hamper creativity and innovation and awqaf development: Islamic Research and Training Institute Member of the Islamic Development Bank Group

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